Europe’s Automotive Plan For The Future Shies From Reality

“I have worries about this kind of report which is like a smoke screen hiding the real issues with almost meaningless twaddle.”

“We need a different way with Europe as a whole putting up the money and the European Commission overseeing plans to take capacity out in a structured way that would help to retrain workers”

The Eurozone is on the verge of breakup, car sales are plummeting, red ink is swamping bottom lines, even the Germans are beginning to feel some pain, but don’t worry, the European Commission has the answer.

Keep calm and carry on.

That was the slogan made famous in Britain during the Second World War, but might well sum up Europe’s instructions to its troubled automotive industry, via a report just published by the E.U.’s executive arm.

The European Commission’s Cars 21 High Level Group has been looking at the problems facing the industry. These include serial overcapacity, high costs, outdated working methods, and pressure to close high-wage factories and move them to less expensive parts of the world.

The report is full of warm words, managerial college cliches and wish lists.

“The status quo for the European automotive industry cannot be maintained: current production capacities will have to be adapted, new production methods devised……….”

“Restructuring, when necessary, should not be resisted, but widely recognised good practices should be followed.”

“A real integrated approach must be fully implemented”

It talks about public funding fostering innovation, (an oxymoron surely?) but doesn’t say how much, or where this money might come from.

In truth, the industry’s problems don’t really concern the native German manufacturers, making fat profits selling their high priced luxury sedans and SUVs to China and the U.S. It is the mass car makers in France like Peugeot-Citroen and Renault, Italy’s Fiat, and the U.S. transplants Ford and GM’s Opel-Vauxhall, that are in trouble.

Camel committee
The European Commission report isn’t likely to be much help.

“Perhaps this should be called the CAMEL21 report. There is an English saying that a camel is an animal designed by a committee. No individual would conceive of something so misshapen and ungainly, obviously cobbled together out of disparate bits and pieces. The CARS21 report matches this description almost to perfection, It is riven with all kinds of untested assertions and pieces of twisted logic,” said John Wormald, analyst with British automotive consultancy Autopolis.

Wormald said the report talks about the need to keep the manufacturing base in Europe, while ignoring the automotive industry’s global reality, which often requires production to move overseas for local markets. The report didn’t attempt to dilute tough fuel economy requirements, which had been rumored, but failed to address the fact that oil-based mass motorisation may eventually be coming to an end.

The report called for more government money to bail-out the weak.

“Why should the automotive industry get additional public resources, implicitly ahead of other sectors? Particularly when it has persistently failed to put its own house in order through serious restructuring – and indeed run to governments for support keeping lame ducks alive,” Wormald said.

Smoke screen
Garel Rhys, Emeritus Professor at Cardiff University’s Business School, wasn’t impressed either.

“I have worries about this kind of report which is like a smoke screen hiding the real issues with almost meaningless twaddle. There’s no such thing as the European industry. Rationalisation won’t take place on a European basis, it will take place on a national basis,” Rhys said.

Rhys said there is too much capacity (up to 30 per cent some say). Many manufacturers, the French in particular, operate with too high a breakeven point and costs are through the roof because of over-manning and inefficiencies. French politicians are trying to describe the problem as European to persuade the E.U. to spend money, and take responsibility, for unpopular action that will lead to French job losses.

“This is a political agenda to divert rationalisation that is required in France and by General Motors and Ford in Germany. Upmarket manufacturers are doing fine like Audi, BMW, Mercedes and (British based) Jaguar Land Rover,” he said.

Meanwhile, worries mount that the eurozone crisis might have a devastating impact on the automotive industry. Fiat-Chrysler CEO Sergio Marchionne said a eurozone breakup could cut European car sales to less than 10 million this year. So far estimates of Western European car sales centre around a fall of six to eight per cent to under 14 million in 2012. This would be the fifth year in a row of declines, but Marchionne’s forecast would be disastrous.

Carlos Ghosn, CEO of Renault and Nissan, expects three or four more years of stagnation in Europe. Renault has asked the French government for financial support and received a positive reply, not surprising after new President Francois Hollande cut the retirement age to 60 from 62 for public sector workers almost as soon as he took office.

According to investment banker UBS, bad news in Europe is now even undermining what it called “safe havens” like Germany. Car sales in Germany dropped 4.8 per cent in May, while reports suggest that even this poor performance was only achieved by dealers buying up cars they couldn’t sell to the public. Weak markets like this probably mean that even mighty Volkswagen, Europe’s leading car maker, is having trouble making money.

Euro core
A eurozone breakup might sound dramatic, but it wouldn’t necessarily do lasting damage. Rhys said a breakup could leave a core using the euro probably including Germany, France, The Netherlands, Czech Republic, Slovakia, Estonia and Finland. Markets would be disturbed at first as consumers stepped back, but there would still be free trade between Germany, France and the rest.

“It would lead to an intensification of the recession before it got better. But markets would react favorably to Europe doing something and surviving,” said Rhys.

According to Rhys, the unthinkable scenario for Germany is for it to be the only economy left standing, forcing it to return to the old Deutschmark.

“This would stop the export drive in its tracks and reverse it. That is their nightmare. The only way the eurozone can continue is if Germany takes on the role of bankrolling it. Germany has already gone through a very difficult 20 years of huge austerity themselves as wages fell and growth stopped. It took the pain and came out the other side stronger than ever so it’s not surprising they are saying if we did it why not the others. The acceptance of austerity will be the central mantra, despite what they are saying in France,” said Rhys.

Whether or not the eurozone remains intact, the European industry’s problems will remain.

Professor David Bailey of the Coventry Business School sees some merit in the CARS21 report, and applauds the retention of ever-tougher fuel efficiency standards. This could pay off big for European manufacturers if they invest in meeting standards certain to echoe globally.

Obama
Bailey says the E.U. should take the lead in helping manufacturers with their restructuring plans, but make sure the old methods are eschewed. Maybe they could take some advice from President Obama.

“In the past, companies often held out for subsidies by playing off plants and governments against each other with the taxpayer footing the bill. As long as governments put up the money this will happen. We need a different way with Europe as a whole putting up the money and the European Commission overseeing plans to take capacity out in a structured way that would help to retrain workers. Something like President Barack Obama did in the States. That helped GM to slim down. Maybe we need something similar in Europe,” Bailey said.

Autopolis’s Wormald said the CARS21 report should have been more ambitious and faced up to some drastic changes that Europe, and everyone else will be facing. If the prospects are as different as Wormald predicts it might take more than a little adjustment.

“We’ve got to think about something different as fossil fuels gradually run out. What are we going to do about sustaining some degree of personal mobility, what kind of systems are we going to use. We are not going to be sticking batteries in the same cars we have now. Vehicles will be much smaller, lighter, less fast and we won’t be able to move around in the same way. Life will change a good deal and we’ll lose a lot of our freedom to dash around all over the place. It will mean a lot of change. It will be difficult to go backwards when you are used to more and more and get a little less,” Wormald said.

Neil Winton – June 20, 2012